Rich Old People Got a Tax Break

An unintended consequence of the Cares Act.

WaPo business columnist Allan Sloan is annoyed that “Wealthy retirees got a tax break from the coronavirus relief bill,” even though it was seemingly unintentional. And only incidentally a tax break.

Here’s something to keep in mind when you watch the House, the Senate and the White House negotiate another proposed 13-digit coronavirus relief bill. It involves one of the Cares Act’s tax breaks, which ended up going largely to older people like me who didn’t need it — but who, like me, aren’t about to give it back.

Let’s hope the legislation that emerges this time around is more careful with our tax money and makes sure that help is going to people who need it. And not to people who don’t.

That’s unlikely! But I agree that should be the goal of the package.

Let me explain the Cares Act giveaway, which involves the rules that govern “defined contribution” retirement accounts.

If you’re 72 or older and have a 401(k), 403(b) or any other kind of defined contribution account, you have to take “required minimum distributions” from your accounts each year. These distributions, determined by your age and your accounts’ year-end balances, are federally taxable and are taxable in some states as well. (People who inherit accounts are required to take RMDs, regardless of their age.)

The Cares Act eliminated the distribution requirements for this year. That’s a nice break for older people like me — I’m 75 — who are fortunate enough to not need distributions from their retirement accounts to pay their bills.

This tax break became part of the Cares Act because Congress didn’t want to penalize people of retirement age by forcing them to sell stock during a market crash. Such a crash seemed to be well underway in late March, when the Cares Act was being discussed.

For instance, if someone age 75, who has a 4.37 percent required distribution for this year, had all her money in an Standard & Poor’s 500 index fund, she would have had to withdraw 8.74 percent of her fund’s balance to meet that requirement if the market were down 50 percent.

Someone age 80, with a 5.35 percent required distribution, would have had to withdraw 10.7 percent

So . . . that seems like a reasonable and decent gesture. Old people were going to be forced to eat up a substantial amount of their retirement funds during what looked to be an epic stock market crash. Why would we want them to do that?

Considering that the S&P was down 30.8 percent on March 23 and was seemingly headed lower, fear of a 50 percent drop was rational.

But rather than doing something intelligent and reasonably fair — such as allowing people to take, say, $15,000 less than their normal required minimum distributions — Congress and President Trump agreed to eliminate RMDs entirely this year.

Obviously, that was worth a lot more to people with big account balances and significant RMDs than to people with smaller balances and smaller RMDs. And it was worth nothing to people who need to take their full minimum distributions to pay their bills.

And guess what? When last I looked, the S&P 500, thanks in part to the Cares Act, was almost 45 percent above its March low — and was actually up slightly for the year.

So if your retirement account consists of S&P 500 index funds, getting to skip your required distributions this year is a terrific deal. Not only do you avoid having to pay federal (and possibly state and local) income tax on your distributions, but if current prices hold, you’ll also end up with growth in the RMD money that you got to leave in your account.

Sweet for financially fortunate older people. Pretty sour for everyone else.

That the stock market didn’t crash—or, at least, stay crashed—would seem to be an unalloyed good. That people who owned more stock benefitted from that than those who owned less—or none—is obvious but not inherently problematic.

Nor is it obvious that the outcome was “sour” for the rest of us. I’m young enough not to be eligible to withdraw from my retirement accounts without substantial penalty and quite a ways off from getting into RMD territory. And I can’t imagine that I’ll be well-off enough at 80 not to need to withdraw from my funds; hell, I’ll be lucky to make it to 80.

Still, some number of rich older folks didn’t get forced to sell off stocks and pay taxes. How does that hurt me? Sure, they paid less tax this year but they’ll have a higher basis next year and at least partly make up for it.

Beyond that, there’s no real sense in which “our tax money” went to these individuals. An unintentional tax break (again, the point wasn’t to give them tax relief but rather to protect them from what looked to be a stock crash) isn’t the equivalent of a check from the Treasury.

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FILED UNDER: Economics and Business, Taxes
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. mattbernius says:

    This definitely reads to me like a case of letting the perfect be the enemy of the good. It doesn’t appear it was intentional and trying to account for edge cases like these often have really bad unintended consequences in emergency legislation that’s being quickly crafted.

    Again, the American obsession with ensuring that only “deserving” people get relief in the midst of a disaster remains a huge problem (and often leads to measures that end up overcomplicating and excluding–or at least making it far more difficult for– the people who most need the funds.

    What is a far greater concern is watching politicians fail to use the time bought to craft better legislation (in part because many appear to have been in denial that an aid extension package would be necessary). As a result we are once again up against a deadline and there isn’t agreement among the Republicans onto what the package should look like.

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  2. Just nutha ignint cracker says:

    @mattbernius:

    As a result we are once again up against a deadline and there isn’t agreement among the Republicans onto what the package should look like.

    Which may, in fact, be the goal for some of those a$$holes–‘no point in trying to do anything this late in the game/when the economy is already stabilizing/that may carry unintended negatives/…’

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  3. Sleeping Dog says:

    The government didn’t care if stimulus checks went to the dead, the idea was to pump money into the economy, same thing here.

  4. DrDaveT says:

    So . . . that seems like a reasonable and decent gesture. Old people were going to be forced to eat up a substantial amount of their retirement funds during what looked to be an epic stock market crash. Why would we want them to do that?

    Because bailing out rich people when they take stupid risks is unfair to non-rich people?

    Think about who we’re talking about here, James. If you are 75+ and have a significant portion of your savings in stocks, then either
    (A) You have so much other wealth that you don’t need this money at all, or
    (B) You are taking an insane risk with your life’s savings out of pure greed.

    Who are these people who only have that 401k, but have it all in stocks even though they are relying on it for income? Why am I supposed to be sympathetic to their plight?

  5. FilthyCapitalist says:

    @DrDaveT: Oh might they be retirees who have low financial sophistication, have all their money “in the market” in hopes of boosting value? Or any number of similar reasons..

    But hey, who has sympathy for the Kulaks. Liquidate the exploiters.